The merger plan between Idea and Vodafone India has finally received approval from the Indian authority. A noncash financial loss of up to RM3.0b is expected to be recognised post the dilution of Axiata’s shareholding in the enlarged entity. All in, we are keeping our Axiata’s FY18E/FY19E core earnings unchanged. We reiterate our OUTPERFORM call on Axiata with a lower SoP-driven target price at RM5.00.

India’s DoT gives final approval to Idea-Vodafone merger. India’s authority (Department of Telecommunications (DoT)) has given its final nod to the merger of Vodafone India and Idea Cellular, which will create the country’s largest mobile operator. Post DoT’s approval, the completion of the merger is now subject to National Company Law Tribunal, Mumbai Branch, passing the dissolution order of Vodafone Mobile Services Ltd and Vodafone India Ltd. All in, the deal is expected to be completed within August 2018.

Largest operator in India. The new telecom behemoth, Vodafone Idea Ltd. will service a customer base of 440m, representing 39% of the total market share. It will dislodge Bharti Airtel Ltd – the current market leader with 344m customers. The merger entity’s revenue is forecasted to be in excess of USD10b with an estimated revenue market share of c.37%. The merger is set to strengthen Vodafone Idea’s position to compete effectively in a market dominated by three main players with immediate synergistic benefits to be realized from the best spectrum position and other operational efficiencies. The deal comes at a time of raging price war, triggered by new entrant Reliance Jio, which has shaken up the local telecom market with free voice calls, low-priced data plans as well as significant handset subsidies. Reliance Jio has spent an estimated USD35b-USD40b on new technologies and 4G network rollouts, far exceeding the combined industry’s total investment over the last 20 years.

Impact on Axiata. Despite the merger providing a robust value creation platform for the consolidated business, it effectively changes the status of Axiata’s stake in Idea from being a strategic investment to a simple investment. Post merger, accounting standards requires Axiata to derecognise and reclassify its investment in Idea from associate to simple investment, as its shareholding in the combined entity is diluted from 16.33% to 8.17%. A technical non-cash accounting adjustment of c.RM1.5b to RM3.0b (based on the share price at the point of the reclassification date) is expected to be captured in the group’s 2Q18 unaudited accounts, according to the Group. Having said that, as Idea’s share price has plunged 48% YTD, it will need to provide higher technical impairment of up to RM3.0b (vs. an earlier range of RM1.2bRM1.8b) and halve its carrying value in Idea stake to c.RM2.4b (vs. RM5.4b currently). Nevertheless, as it is purely a non-cash technical treatment, the exercise does not have any impact on Axiata’s underlying performance and cash position.

Maintain OUTPERFORM but with lower SoP-driven TP of RM5.00 (vs. RM5.15 previously). While we are keeping our FY18/FY19E core PATAMI forecasts unchanged for now, pending the upcoming results review, we have lowered our FY18 LATAMI to RM2.1b (vs. LATAMI of RM500m previously) after revising our technical impairment expectation to RM3.0 vs. RM1.4b previously. Besides, we also revised Axiata’s stake in Idea to 8.17% under our SoP valuation to reflect the dilution impact. Maintain OUTPERFORM as the share price still provides more than 10% upside from here. We believe the current share price weakness has, to a certain extent, priced-in the write-down on Idea. Key risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility.

Source: Kenanga Research - 30 Jul 2018